MFIN to launch natural catastrophe insurance cover for micro borrowers

The MicroFinance Institutions' Network is planning to introduce this product with Cholamandalam MS General Insurance as insurer

With India becoming one of the most climate risk-prone countries and the frequency and severity of natural catastrophe (NatCat) events increasing every year, which is impacting repayment capabilities of borrowers of microloans, and the micro lenders’ asset quality, the MicroFinance Institutions’ Network (MFIN) is planning to introduce an insurance product for borrowers to protect them against such natural catastrophe events.

MFIN, which has applied for a pilot project to the Insurance Regulatory and Development Authority of India (IRDAI) under regulatory sandbox, has now received the nod form to conduct the project. Cholamandalam MS General Insurance will provide the insurance cover during the pilot project.

“The pilot will cover 3-4 districts in Orissa,” said Alok Misra, CEO and director, MFIN. “We are now preparing the field, training the staff, to make the client understand the nuances of the scheme. There are three or four perils which will be covered like cyclones, typhoons, drought etc; the cover will be parametric insurance in nature,” Misra told Business Standard.

Parametric insurance is a non-traditional insurance product that offers pre-specified payouts based upon a trigger event.

“Suppose in the policy there are three perils covered; it is up to the client how many covers they want to take. They can take all the three, or take one or two covers,” he added.

According to MFIN, the impact on the livelihoods because of a natural calamity, and the earning capacity of the low-income households (LIH) is more prominent due to their high vulnerability.

Microfinance industry which serves around 60 million households, most of which belong to the low-income category, are highly susceptible to such events.

“For such clients, NatCat event not only affects their ability to earn but at the same time they have to meet their loan repayment obligations, putting them under severe financial stress and the danger of getting excluded from formal financial services if their loans turn into NPA. At the MFI level, such events lead to the weakening of portfolio quality and therefore higher provisioning requirements/write-offs and the resulting impact on their profitability,” MFIN said.

Three to four installments of the micro borrower will be covered with the insurance. In case of a natural catastrophe, the installments will be paid by the insurer on behalf of the borrower.

Microlenders said the introduction of such an insurance cover for their customers will ensure loans do not slip to the non-performing category if a borrower is unable to pay due to a natural calamity.

“With effects of climate change visible now it makes immense sense to offer a natural calamity cover for our micro borrowers so that get covered in such a situation and do not slip into delinquency and NPA,” said Manoj Nambiar, MD & CEO, Arohan Financial Services – a Kolkata based microfinance institution.

After the pilot is completed, which is expected in four months, MFIN will go back to IRDAI with the learnings and will seek approval to launch the product.